An institutional framework for the global carbon market: options and implications

The European Emissions Trading Scheme (EU ETS), operational since 2005, is the frontrunner in this development. The European Commission sees the EU ETS as a blueprint for emerging schemes around the world and the nucleus for creating a global carbon market. It aims to establish full bilateral links to other ETSs under the condition that these schemes are mandatory, based on absolute caps and don’t contain price ceilings for emission allowances.
The EU law does not indicate whether the adoption of linking agreements should be accompanied by the establishment of new institutions entrusted with the regulation and supervision of linked carbon markets. Once the linking arrangement enters into force, disputes and irregularities may indeed arise across the link between participants in each emissions trading scheme, necessitating adequate dispute settlement mechanisms, but also raising the question of accountability by both participants and any institutions or officials supervising the operation of the link.
This analysis will address more in depth what kind of institutions would be needed to supervise linked carbon markets and facilitate a smooth transition to a globally integrated carbon market. When exploring options for the improved governance of an integrated carbon market, we shall focus on the question of what could be learned from the trade area which started with bilateral free trade agreements, evolved into a comprehensive multilateral regime (GATT) and finally resulted in the creation of a powerful new organisation, the WTO.